Britannia Radio

It's "Heads You Win, Tails You Don't Lose" with This Currency By Tim Staermose, chief investment strategist, Sovereign Man Saturday, June 25, 2011 HONG KONG: One of the most interesting things going on here in Hong Kong at the moment is the gradual displacement of the U.S. dollar, and even the local Hong Kong dollar, by the Chinese yuan. ----------Advertisement---------- Would you buy this at a 99% discount? ATTENTION: STANSBERRY RESEARCH SUBSCRIBERS – About a year ago, we started a unique program in the financial industry, which allows you to get access to our best ideas, at a 99% discount on what they would otherwise cost you. Please check out the full story here if you are interested in paying dramatically less than others currently pay to access these ideas. --------------------------------- Walking around town, the signs are obvious: from shops that gladly accept Chinese yuan cash for the goods they sell, to the money changers that now ALL display the Hong Kong dollar/Chinese yuan cross-rate much more prominently than the U.S. dollar/Hong Kong dollar cross-rate. In many ways, this is a live economic experiment. Hong Kong has long had one of the world's freest, most sophisticated economies; residents are free to choose what currency to accept (and save), whether HK dollars, U.S. dollars, Chinese yuan, gold, or anything else. Multi-currency bank accounts are the rule rather than the exception here. And you can switch freely between all of them with a few mouse clicks or a phone call. This is one of the reasons why Sovereign Man founder Simon Black has always been so keen to recommend banking in Hong Kong. Yuan-denominated deposits in Hong Kong banks have more than TRIPLED this year as people look for ways to protect their purchasing power. Because the Hong Kong Monetary Authority pegs its currency to the U.S. dollar, Hong Kong ends up importing U.S. inflationary monetary policy. This is acutely felt. Since Hong Kong is little more than a barren rock, nearly EVERYTHING is imported… so prices are rising in accordance with U.S. dollar inflation. To guard against this constant loss of purchasing power, many of Hong Kong's residents are converting their savings to Chinese yuan. While the Chinese yuan closely shadows the U.S. dollar, it has steadily appreciated and is perceived to have significant future upside should the Chinese ever allow it to appreciate more quickly. U.S. monetary inflation makes it inevitable that the Hong Kong Monetary Authority will come up with some sort of a scheme to either peg the Hong Kong dollar to the yuan (rather than the U.S. dollar) or perhaps even replace the Hong Kong dollar with the yuan altogether. This would be a HUGELY popular move. Hong Kong is one of the few places on Earth with a net savings rate. The loan-to-deposit ratio of its banking system, for example, stood at 81.7% at the end of March, meaning there are only 81.7 cents lent out in Hong Kong for every $1 on deposit in the banks. Consequently, savers would love to see the Hong Kong dollar revalued higher by pegging it to the Chinese yuan at the current yuan/dollar rate of about 6.50, rather than the current HK dollar/U.S. dollar peg of 7.80. What's more, a move to re-peg the Hong Kong dollar is anything but far-fetched when you consider that Hong Kong's "net savers club" includes the government, which is sitting on a HUGE surplus. So much, in fact, that the government recently announced it's handing back HK$6,000 (US$770) to each Hong Kong permanent resident. Bottom line, the clock is ticking on a Hong Kong dollar revaluation. The yuan is a much better cultural and economic fit, and this brings me to the crux of today's letter: If you have significant expenses to meet in U.S. dollars, you may be uncomfortable taking on currency risk by parking your money in a more volatile foreign currency such as the Aussie dollar or Canadian dollar. Let's face it, they do have periods where they fall significantly versus the greenback. By holding savings in Hong Kong dollars, though, you will have minimal downside risk if the Hong Kong Monetary Authority keeps the status quo and maintains the U.S. dollar peg. Your Hong Kong dollars will always buy the same amount of U.S. dollars they buy today. But you will have a free "call option" in case the Hong Kong dollar is revalued higher. It's a bit like a "heads you win; tails you don't lose" situation, and that's EXACTLY the kind of trade I have dedicated my professional life to uncovering. Good investing, Tim Editor's note: Our colleague Tim Staermose heads the investment arm ofSovereign Man – a group specializing in international investments, global banking opportunities, and second passports. There's no one who knows more about the subject than these guys. For example, they recently discovered a special kind of offshore account not one in 100,000 Americans has heard of. It's 100% U.S. legal, and it just might save your retirement money from the government. For more on this unique idea and Sovereign Man, click here. Further Reading: The U.S. dollar isn't the only currency falling out of favor in the world. The euro is also tanking. The best protection you can have against this global currency crisis is to get into "real money" – gold. "I've heard lots of supposedly smart institutional investors pooh-pooh gold because it didn't perform well during the 1980s and 1990s," Brian Hunt says. But "gold isn't an investment like stocks and real estate can be. Gold is just gold. You own it and hope to never have to use it." Read more here: What you don't know about gold: The biggest myths on the gold market.